Searching for a Miracle Solution

THANKS to the taxpayer, the National Health Service is currently enjoying an unprecedented boost to its finances. The NHS budget has doubled over the past eight years and the bonanza will continue until 2007-08. By then, total health spending will have risen from 6.8% of GDP in 1997 to 9.2%, higher than the latest average in the rest of the European Union.

So this might seem an odd moment for a senior doctor to call for a switch in the way that the NHS is financed. Yet that is what Bernard Ribeiro, the new president of the Royal College of Surgeons, has done. In an interview with the Daily Telegraph published on August 13th, he argued that a tax-based system will be unable to cope with future health-care demands. Instead, Britain ought to emulate the social-insurance model of Germany and France, in which the main source of finance is contributions levied on workers’ pay.

Mr Ribeiro’s intervention has re-opened a debate that Gordon Brown peremptorily closed in 2002. It was then that the chancellor of the exchequer announced a five-year cash settlement for the NHS stretching ahead until 2007-08. That appeared to resolve the issue, which did not feature in the general election.

What lies behind Mr Ribeiro’s remarks is a concern about what will happen from the spring of 2008. That date, which once seemed so distant, is now looming. Doctors and health managers are starting to fret about the ability of the NHS to cope with more austere times.

But would a switch away from tax funding help? There are three main models of health-care finance in the developed world. In Britain, Canada and Sweden, among others, the principal source of revenue is general taxation. In many European countries, funding comes mainly from compulsory social-insurance contributions paid by workers and their employers. America is unusual in that private funding accounts for a much bigger share of total health-care spending because most workers and their families are insured privately through their employers. Public spending, which goes mainly to the old and the poor, is financed through a mix of general taxes and payroll contributions.

The European and American models are becoming a bit more like the British one. In France, for example, social-insurance contributions are now buttressed by a general tax on income. In America, a big expansion of government spending on older people to help pay for their drugs bills will be financed from general tax revenues. And in Britain, Mr Brown pushed up social-insurance contributions in his 2002 budget to raise money for the surge in spending on the NHS.

This suggests it is unrealistic to expect any one model to deliver a more buoyant source of revenue. Across the developed world, health budgets are feeling the strain. In Germany and France, governments have had to push through reforms to try to constrain spending. In America, there is mounting concern about the spiralling cost of health care, which has risen to 15% of GDP.

Nor does any of the financing models clearly have an advantage in keeping a lid on health spending. Despite their apparent variety, they are all forms of insurance, which means that a third party picks up the tab, weakening the resistance to medical bills. These keep on rising because of expensive advances in medical technology in a marketplace where providers are particularly powerful since doctors determine what medical care is necessary.

In most insurance markets, competition between insurers puts pressure on the costs of providers. But competition between health insurers is ineffective because the commercial incentives are for insurers to compete for healthy patients, who cost little, and to exclude the sick, who cost a great deal. This is an argument for a single insurer, like the NHS, that can cover everyone and stand up to powerful medical providers. In practice, however, much of the extra spending on the health service in recent years under Labour has been absorbed in higher pay.

Finding an alternative source of finance is not the way forward for the NHS. Rather, the goal must be to get better value for the record sums of money being lavished on it. This is a lesson that the Labour government has learnt slowly and expensively. It began by throwing money at an unreformed NHS. Then it realised it had to drive a much harder bargain. Since 2002 it has been striving to intensify competitive pressures through two main reforms.

First, the health service is being reorganised as an internal market, in which money is not doled out to hospitals, but, rather, follows the patients and the treatments they need. A new payments system means that hospitals are paid according to how busy they are. That puts pressure on under-performing hospitals. High-performing hospitals that win “foundation” status are being encouraged to do even better since they can keep financial surpluses and reinvest them in services.

Second, hospitals are facing much greater pressure from outside the NHS. The government has turned to the private sector to provide more medical care, subverting the dogma that public funding must mean public provision. Since the general election, Patricia Hewitt, the health secretary, has announced a further wave of contracts to private providers. The aim is that by 2008 the independent sector will carry out around 10% of elective care, helping the government achieve its goal of a maximum waiting time of 18 weeks for non-emergency treatments.

A worry about the reform programme is that the purchasers in the internal market—the 300 or so local primary-care trusts that commission care for their populations—are not up to the job. So the government is seeking to pep them up. Many will merge and they will achieve greater focus on purchasing by shedding, where possible, their other function of providing some primary care themselves. Family doctors will be given a greater role, backed by budgetary incentives, in commissioning.

There is plenty to criticise in Labour’s handling of the NHS. But the current direction of reform is the right one. Instead of yearning for new sources of extra revenue after years of bumper budgets, doctors should accept that securing better value for money must be the priority.